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Sri Lanka banks may get bad loans in 2017: S&P

Mar 24, 2017 09:00 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Bad loans at Sri Lankan banks may climb this year after two years of strong loan growth, as capital buffers are also getting thinner, S&P Global Rating said.

"We anticipate loan growth at a low or mid-teen percentage in 2017, and estimate that the reported non-performing loan (NPL) ratio will rise to about 3.0-3.2 percent over the next year from about 2.6 percent as of December 31, 2016," S&P Global ratings credit analyst Deepali Seth-Chhabria said in a statement.

"The NPL ratio has improved for the past three years due to the removal of non-performing gold-backed lending from the books. Now that the positive impact of the removal is fully played out, the NPL trend could reverse."

High credit growth was also reducing capital buffers at banks, S&P said.

The full statement is reproduced below:

Asset Quality May Deteriorate At Sri Lankan Banks This Year

SINGAPORE (S&P Global Ratings) March 23, 2017--Sri Lankan banks are likely to be under greater strain in 2017, according to a report that S&P Global Ratings published today, titled "For Sri Lankan Banks, A Likely Decline In Asset Quality Could Stretch Capital Buffers."

"We expect overall asset quality in Sri Lanka's banking system to weaken, partly fueled by the banks' aggressive loan growth over the past two years. But the country's favorable economic growth prospects should help to limit the deterioration in both NPL ratios and profitability," said S&P Global ratings credit analyst Deepali Seth-Chhabria.

We anticipate loan growth at a low or mid-teen percentage in 2017, and estimate that the reported nonperforming loan (NPL) ratio will rise to about 3.0%-3.2% over the next year from about 2.6% as of Dec. 31, 2016. The NPL ratio has improved for the past three years, due to the removal of nonperforming gold-backed lending from the books. Now that the positive impact of the removal is fully played out, the NPL trend could reverse. We expect the industry's loan growth to slow following steps by the central bank of Sri Lanka to control growth. However, if loan growth remains high, the banks' already-declining capital levels could drop further. This may further reduce the buffers required to absorb the pain that could come from worsening asset quality. We believe the funding profile of the banking system has also deteriorated somewhat, and note that the proportion of borrowing to the overall funding base has slightly risen. In view of these risks and the negative outlook on the sovereign credit rating on Sri Lanka (B+/Negative/B), our ratings on banks and finance companies in Sri Lanka continue to have negative outlooks.